Commentary

Obamacare won’t force hospitals to compete openly

Commentary: Patients are biggest losers from ‘reckless’ hospital M&A

By

JonathanBush

Watching hospitals merge and consolidate with the Feds in hot pursuit reminds me of that final memorable scene from Thelma and Louise. Except these hospital executives actually think they’re going to soar across the canyon. As they squeeze each other’s hands and punch the accelerator, they don’t seem to realize they’re on a sure path to suicide.

As a New York Times article, “New Laws and Rising Costs Create a Surge of Supersizing Hospitals,” reported last August, the number of hospital M&A deals doubled to 105 in 2012 from 50 in 2009. Consolidation is happening at a reckless pace. Not only are health systems — nonprofit and for-profit alike — acquiring hospitals, but they’re also buying up mom-and- pop practices at an unparalleled clip. Today, just 36% of physicians work in independent practices, down from 57% in 2000.

What’s driving this feeding frenzy? As care moves out of the hospital to lower-cost ambulatory settings, hospitals are striving to offset the decline in admissions by growing their roster of doctors as a means to take in more patient volume. They want heads in beds — even if higher-quality/lower-cost care can be found down the road.

This strategy runs completely counter to the broader societal goal of reducing health care costs. Aside from being morally void, it also can’t win in the long run. All it takes are a few disruptors offering cheaper alternatives to make these supersized entities run off the cliff.

We’ve seen this movie before and know how it ends. Consolidation in any industry typically occurs when the established players become trapped in a fixed cost base that they can’t jettison, even when new entrants come in and change the price of the product along with consumer expectations. It happened in the airline industry when JetBlue and Southwest Airlines came in with great service and prices below the incumbents’ fixed costs. It’s starting to happen in the broadcast world where YouTube, Amazon, Netflix and other new players are offering better, less-costly programming via the Internet and making cable giants like Comcast and TimeWarner very nervous.

Jonathan Bush, CEO of athenahealth.

But there’s one big difference between these industries and health care: while people are watching TV and flying more than ever, in health care everyone from the government to payers is focused on reducing the number of patients and utilization in the system.

So, what does all of this mean for patients?

Ironically, what’s best for the patient has not been a big driver for the health-care industry, despite the outsized impact it has on our collective pocketbooks, today representing 18% of GDP and 20% of income. The public promise of consolidation is typically the proposed efficiencies and cost savings that come with scale, but little of the activity we’re seeing from hospital mergers is related to efficiencies of scale.

Instead, the almost singular focus of these mergers is on capturing physician referrals at the expense of cost efficiency, with newly merged entities offering fewer choices at higher prices than they did before. In some markets, in fact, we have seen some supersized health systems charge 200% to 300% more than they charged prior to consolidation for the exact same services.

Consolidation in health care can only be a path to success if it is a first step towards building an integrated offering of complete care which can then be sold to employers at a lower cost than is currently offered by HMOs. If vertical and horizontal mergers among hospitals don’t get us there and seek only to raise prices or drive higher utilization, they will face certain death. (Which, by the way, would not be as tragic as it sounds, given most research shows we have 30%-40% more hospital beds than we need in this country.)

As we’ve seen within other industries that have witnessed disruption, market outliers are the key to accelerating change. Companies like Whole Foods, Apple and Southwest Airlines took on the tired status quo in their respective industries: uninspired grocery store chains, impersonal computing, and layovers.

These companies saw a frontier where they could bring more to the market — widely-available fresh local food, a new personal computing experience, and cheap direct flights. They innovated on the edge of established markets and found extraordinary profit doing it.

In health care, patients are already benefiting from innovation that’s occurring at the edges of the industry: retail clinics and urgent care centers providing convenient, off-hours care, telemedicine advancements, specialty care outposts, MRI centers offering services at half the cost of the hospital down the street, independent practices embracing technology to engage patients and deliver a more satisfying care experience.

The point is that the consolidate-to-win strategy is locking doctors and patients into closed, overly expensive care biospheres that aren’t being challenged often or enough. These behemoths continue to grow by too often operating in opposition to our country’s shared goals for health care: to lower cost and increase transparency. They are using technology as a shield, to defend their market share, when they should be using technology as sword, to compete on cost and quality. It’s time they hit the brakes on their M&A activities and began to compete on the terms that matter most to their patients.

Jonathan Bush is CEO and president of athenahealth,
ATHN, -1.71%
a provider of cloud-based services for electronic health records, practice management, and care coordination.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.